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TMI Blog2016 (5) TMI 242X X X X Extracts X X X X X X X X Extracts X X X X ..... d against assessee Allowability of interest expenses under the provisions of section 57(iii)- Disallowance of interest claimed by assessee against interest income shown under the head income from other sources - Held that:- In order to claim expenses under the provisions of section 57(iii) of the Act nexus has to be proved that the same has been incurred for earning the income shown under the provisions of section 56 of the Act i.e. the income from other sources. Applying these provisions to the facts of the case, we find that assessee has declared interest income of only ₹ 534557/- and has claimed interest expenses of ₹ 4554551/- Out of total interest claimed at ₹ 4554551/- Assessing Officer has already allowed the claim at ₹ 2199959/- and for the balance amount of interest of ₹ 2354592/- nothing was placed on record by the assessee to prove that it has been spent to earn interest income which has been declared u/s 56 of the Act and rather we find force in the observation made by ld. Assessing Officer that the amount of interest of ₹ 2354592/- has been paid on loans taken has actually been diverted towards investment in shares and other non-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses of ₹ 54,29,5087- made by the Assessing Officer consisting of- (a) Depreciation ₹ 110869 (b) Interest paid to bank ₹ 218635 (c) RTO Tax ₹ 9766 (d) Interest paid to others Rs.1534307 (e) Bad debts written off Rs.3047240 (f) Misc. Services ₹ 100000 (g) Sales Tax ₹ 393368 (h) Misc. other expenses ₹ 15323 2. The C.I.T.(Appeals) erred in upholding the disallowance of interest of ₹ 23,54,592/- as made by the Assessing Officer. 3. The C.LT.(Appeals) erred in upholding the decision of the Assessing Officer in assessing the insurance claim received of ₹ 30,443/- and sundry balance written off of ₹ 14,054/- under the head income from other sources instead of under the head income fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 144A of the Act on 30/3/1999 and total income was determined at ₹ 1,19,50,490/-. Assessee went in appeal before ld. CIT(A) who vide his order dated 31.10.2000 confirmed the addition made by Assessing Officer except the amount ₹ 7,836/-. 7. Aggrieved, assessee went in appeal before the Tribunal and vide its order in ITA No.38/Ahd/2001 and 2100/Ahd/2001 for Asst. Years 1996-97 and 1997-98 dated 28/09/2006 set aside the order of the CIT(A) and restored the matter to the file of Assessing Officer to decide the issue de novo. 8. Thereafter assessment was framed under section 143(3) r.w.s. 254 of the Act on 26/12/2007 determining income at ₹ 1,19,42,652/- 9. Ld. CIT(A) partly allowed the appeal of assessee. Aggrieved, assessee is now in appeal before the Tribunal. 10. We take up ground no.1 in which ld. CIT(A) has confirmed the disallowance of business expenses of ₹ 54,29,508/- consisting of - (a) Depreciation ₹ 110869 (b) Interest paid to bank ₹ 218635 (c) RTO Tax ₹ 9766 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed and, therefore, during the course of assessment proceedings u/s 143(3) r.w.s. 254 of the Act, ld. Assessing Officer was needed just to allow the expenses and there was no necessity to go into the merits of the genuineness of the expenses being incurred for business expediency or not. 13. On the other hand, ld. DR submitted that Hon. Tribunal restored the issue back to the file of Assessing Officer to consider the allowability of expenses on merits with a decided fact basis that assessee has proved to be indulging in carrying on business activity. 14. We have heard the rival contentions and perused the material on record. The issue now before us is in the second round for adjudication that whether the ld. CIT(A) was correct in upholding the disallowance of business expenses of ₹ 23,82,268/- (total amount referred in ground no. at ₹ 54,29,508/- less bad debts ₹ 30,47,240/-) relating to following expenses (a) Depreciation ₹ 110869 (b) Interest paid to bank ₹ 218635 (c) RTO Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was directed by the Hon. Court to provde safety facility to the occupants in the building in question. Therefore,it cannot be said that the assessee was not carrying on business. We find that the assessee was carrying on business. We are of the considered opinion that, all the expenses has to be allowed. We find that the AO made all the additions on the ground that M/s Labh Enterprise has not carried out the business activities. As we hold that the assessee has carried out the business, the assessee is entitled to deduction of all the expenses under the head business income and also the assessee is entitled to other claims. It is pertinent to note here that in the FY 1998-99 the Revenue has treated the income of the assessee as income from business and M/s Labh Organisers was allowed the loss and the revenue has accepted that decision which is evident from the assessment order for AY 1999-2000, a copy of which is placed on pages 35-36 of the paper book. In view of the above, we set aside the order of the CIT(A) and restore the matter to the file of Assessing Officer for making assessment de novo in the light of our above observation in respect of all three issues. 7. We are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (g) Sales Tax ₹ 393368 (h) Misc. other expenses ₹ 15323 Excluding (e) Bad debts written off ₹ 3047240/-. In view of above referred expenses of ₹ 23,82,268/- depreciation at ₹ 1,08,869/-, interest paid to bank at ₹ 15,34,307/-, RTO expenses at ₹ 9766/-, Misc. other expenses at ₹ 15,323/- and sales tax at ₹ 3,93,368/- and consultancy charges for special audit for ₹ 1 lacs are related to the business activities and few of them are even related to the erstwhile partnership firm M/s Labh Enterprise which was taken over by the assessee as a running business and was continued as sole proprietor business concern in the year under appeal. Similarly, interest expenditure of ₹ 15,34,307/- is in relation to unsecured loan standing at the end of FY 1994-95 i.e. Asst. Year 1995-96 in the books of M/s Labh Enterprises. As all these expenses discussed here in paragraph at ₹ 23,82,268/- are related to the business activity of M/s Labh Enterprise and in view of the fact that it has been held by the co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21. The ld. AR reiterated the submissions made before the lower authorities and further referred to the provisions of section 36(2)(v) of the Act and submitted that the assessee will be entitled to claim bad debts in the year in which the said amount has been debited to profit and loss account. 22. On the other hand, ld. DR controverted the submissions made by ld. AR in relation to amount of bad debts claimed by the assessee at ₹ 30,47,240/- in relation to irrecoverable amount from Samrajya Co-op. Housing Society. Ld. DR submitted that in the financial statements of M/s Labh Enterprise (partnership firm in schedule-G of the balance sheet as on 31.3.1995 the outstanding amount to be received from Samrajya Co-op. Housing Society was shown at ₹ 1480458/- which further increased to ₹ 2301018/- in the balance sheet of M/s Labh Enterprise (sole proprietorship concern) as on 31.3.1996. The ld. DR also referred to page 13 of the paper book in regard to the Memorandum of Understanding (MOU) effected on 29.2.1996 between the Samrajya Co-op. Housing Society and M/s Labh Enterprise and in this MOU at page 2 (page 14 of the Paper Book) following clause is appearing :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owner i.e. partnership firm we agree with the submissions made by ld. AR to this effect and also to the law laid down by the Hon. Supreme Court in the case of CIT vs.T. Veerabhadra Rao K. Koteswara Rao Co. (1985) 155 ITR 152 (SC) referred and relied on by the ld. AR wherein their Lordships have held as below :- It seems to us that even if the debt had been taken into account in computing the income of the predecessor firm only and had subsequently been written off as irrecoverable in the accounts of the assessee, the assessee would still have been entitled to a deduction of the amount written off as a bad debt. It is not imperative that the assessee referred to in sub-cl. (a) must necessarily mean the identical assessee referred to in sub-cl. (b). A successor to the pertinent interest of a previous assessee would be covered within the terms of sub-cl. (b). The successor assessee, in effect, steps into the shoes of his predecessor. Accordingly, we hold that the assessee in the instant case was entitled to the deduction as a bad debt of the sum of ₹ 15,100 written off by it in its accounts of the previous year as irrecoverable. 24. Respectfully following the above d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 54,29,508/- we delete the addition of ₹ 23,82,268/- and sustain the remaining part at ₹ 30,47,240/-. This ground is partly allowed. 27. Now we take up ground no.2 raised by assessee against the action of ld. CIT(A) in upholding the disallowance of interest of ₹ 23,54,592/-. 28. From going through the records, we find that this disallowance is in lieu of interest claimed by assessee against interest income shown under the head income from other sources. Ld. Assessing Officer has dealt with this issue of interest expenses of ₹ 23,54,592/- in his assessment order at pages 10 11 which reads as under :- 12. INTEREST EXPENSES ₹ 23.54.592/- On perusal of the submitted details it is observed that the assessee has claimed total interest of Rs, 45,54,551/- as expenses and on the other hand, interest income declared of ₹ 5,34,557/-.During the originally assessment the A-O. has observed that the assessee has taken unsecured loans of ₹ 3,21,23,958/- and utilization thereof was as under: Application of unsecured loans Share investment Rs.2,65,60,243/- Interest bea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee . 12.3 After careful consideration of the assessee submission it is found that the assessee has not submitted any factual details but reproduce the finding of Hon'ble ITAT. Since, it was established in original order that the interest expense was related to personal expenses. Further, the assessee has paid interest on the borrowings taken/accepted during the year, which was utilised for the purpose of repayment of old borrowings of the partnership firm, of which the assessee became proprietor due to dissolution, the payment of interest for such old partnership borrowings was not related to current business of the assessee, the expenditure of interest was not for the purpose of business of the assessee i.e., construction business as claimed by the assessee. The payment of interest is to pay off old liabilities, which are not pertaining to the business of the assessee as claimed, on the contrary the payment is towards old liabilities, which can be said as of personal nature, as the assessee as accepted the liabilities on his head, without looking to the commercial aspect and the expenses to pay off such liabilities cannot be said as for the purpose of business, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee i.e., construction business as claimed by the assessee. The payment of interest is to pay off old liabilities, which are not pertaining to the business of the assessee as claimed, on the contrary the payment is towards old liabilities, which can be said as of personal nature, as the assessee as accepted the liabilities on his head, without looking to the commercial aspect and the expenses to pay off such liabilities cannot be said as for the purpose of business, therefore, the interest payment is purely of personal nature, for which the assessee has taken conscious decision by taking ownership of loss making firm in dissolution. 10.4 Since, the Ld.A.R. has not provided complete details for interest expenses to prove their business expediency, I do not find any reason to interfere in the findings of the A.O: at this stage. Therefore, the disallowance made by the A.O. is hereby confirmed. 30. Aggrieved, assessee is now in appeal before the Tribunal. 31. The ld. AR did not bring anything new except referring and relying on the decision of the co-ordinate bench in the case of assessee wherein it was held assessee is carrying on regular business activities. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4592/- has been paid on loans taken has actually been diverted towards investment in shares and other non-interest bearing investment and this gets further support by the fact that assessee has earned long term capital gains of ₹ 13260055/-. In these circumstances, we are unable to accept the contention made by ld. AR of assessee about the allowability of interest expenses at ₹ 2354592/- under the head income from other sources and we uphold the order of ld. CIT(A) and accordingly dismiss this ground of assessee. 36. Ground no.3 of assessee s appeal relates to insurance claim received of ₹ 30,443/- and sundry balance written off of ₹ 14,054/- We have heard the rival contentions and perused the material on record. The only issue in this ground is that the insurance claim of ₹ 30,443/- and sundry balance written off at ₹ 14,054/- has wrongly been held as income from other sources instead of income from business by ld. CIT(A). We are of the view that in the light of decision of the co-ordinate bench in assessee s own case in ITA No.38/Ahd/2001 and ITA Np.2100/Ahd/2001 wherein it has been held that assessee has carried out the business activities ..... X X X X Extracts X X X X X X X X Extracts X X X X
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